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Dead Wrong: America's Economic Assumptions

by Jim Clifton

Chairman and CEO of Gallup

The U.S. could go broke due to faulty leadership assumptions. Gallup's CEO offers three correct assumptions that, if acted on, would save the American economy.

During my 40 years at Gallup, I've observed that one of the main reasons very talented leaders fail is because their thinking failed them. Not their leadership or management skills, which in many cases are just fine, but their thinking. Specifically, failed leaders in business and politics are usually wrong about a core premise that drives all their strategies. Because they are so wrong about that premise, every subsequent decision they make is bad.

An innovation has zero value until a talented businessperson finds a customer for it.

Let me illustrate. Thirty years ago, I conducted a project in a Midwestern city for a group of talented investors and businesspeople. This was a time when McDonald's franchises were growing quickly, and these businesspeople wanted to emulate the fast-food chain's success. They came to the conclusion that McDonald's was soaring because of one key attribute: speed of service.

So these smart, talented people built everything around this one assumption, and they committed to delivering food faster. Pneumatic tubes shot the food to the customer, and the company touted its service as the fastest. They even named the chain "Chutes."

As I recall, they did get hamburgers and fries to their customers faster than McDonald's did. They achieved their goal. Yet they went broke because we discovered after the fact that the primary reason McDonald's was exploding was because customers loved the taste of their food -- especially the french fries. Speed was not the core reason McDonald's customers ate there; taste was. Chutes' core assumption was wrong, and they went broke.

I could share hundreds of examples like this. Here's another one with far greater implications for the world. Many people in the highest levels of U.S. government think that 1.5 billion Muslims are uncomfortable with the West because they "hate us for our freedom" and that "religion divides us." So, leaders build policy -- war, economic sanctions, and anti-terror campaigns -- around these assumptions. But Gallup World Poll data tell another story entirely.

The world's Muslims don't hate us because of our freedom or our way of life or because they're religious fanatics. Gallup finds that their discomfort comes predominantly from a hopelessness rooted in economic despair and joblessness. This is an economic problem, not a religious one. Yet too often, policies are created around these wrong assumptions.

When Tunisian food vendor Mohammed Bouazizi set himself on fire, thus igniting the Arab Spring, he didn't yell, "Death to America" or "Allahu akbar." He cried out, "I just want to work!"

In this article, I will review some faulty leadership assumptions that are causing the U.S. economy to stagnate and that may lead the country to go broke. More importantly, I will offer three correct assumptions that, if adopted by leaders and policymakers, could form the basis of an American economic resurgence.

Correct assumption No. 1: Entrepreneurship trumps innovation

Many thinkers and leaders in the U.S. and around the world have reviewed decades of America's global economic dominance and concluded that the country has been a colossus because of superior innovation. That is the global conventional wisdom, the core assumption. Thousands of conferences around the world have been organized around this assumption. Some countries are even building "innovation cities."

In my view, rooted in decades of Gallup research and our company's work with many multinational corporations and city and national governments, this assumption is dead wrong. And I believe that America has stopped growing because leaders are governing from this faulty premise.

The U.S. cannot innovate its way out of its stagnant growth. It must enterprise its way to prosperity. Simply put, when it comes to fostering long-term economic growth, entrepreneurship trumps innovation. Put another way: An innovative product or service has no commercial value until a talented businessperson finds a customer for it.

Thought leaders often ask me: Aren't innovation and entrepreneurship like the chicken and the egg? Which really comes first? My answer is: That's the wrong analogy. The right one is the cart and the horse. Entrepreneurship is the horse, and innovation is the cart.

The problem is that because America's economic premise is currently wrong, the country just keeps loading the cart with innovative ideas. What the U.S. needs instead is a team of horses to pull the best ideas into the marketplace. I'll say it again: An innovation has zero value until a talented businessperson finds a customer for it.

Almost nobody in Washington understands this. Innovation, discovery, breakthroughs, ideas, and creativity are wonderful -- we can't get enough of them. But they create little to no economic energy in and of themselves. The car, the light bulb, flight, or the Internet created little to no economic energy until each was successfully commercialized.

You might say, "Well, I see a lot of entrepreneurial activity in the country." Yes, the U.S. is probably the best in the world at encouraging and fostering entrepreneurship. But it's still not systematically built into our culture the way innovation, or intellectual development, is.

The U.S. has no peer at high-level intellectual development. The country has many of the best universities in the world. And the best of America's private and public K-12 schools do a marvelous job at intellectual development, which is nurtured systematically and intentionally. But entrepreneurial development is completely left to chance. Right now, if you're a 12th-grader blessed with an unusually high IQ -- perhaps even in an inner-city neighborhood like California's Compton or Watts -- testing will find you. And if you're really brilliant, you'll get extra special treatment and possibly scholarships to the best schools in the country. You may even get financial help all the way to a Ph.D. at MIT, then go off to NASA, the National Institutes of Health, or the like. If you're blessed with real talent to think and learn, the system likely will find you.

If you were born with rare entrepreneurial talent, the system has no way of finding you.

However, if you were born with rare entrepreneurial talent -- unusual determination, optimism, and problem-solving skills -- the system has no way of finding you, certainly not in Compton or Watts. Nothing finds you. There is no formal identification system. There are no formal special classes, no colleges bidding for you, no evening classes with the best teachers, and nothing sent to your parents that identifies you as gifted. Colleges and universities place tremendous weight on SAT or ACT scores. But nobody asks about the applicant's ability to start a company, build an organization, or create millions of customers. America leaves that to chance.

The U.S. sure can identify other rare talents. There are lists that rank blue-chip running backs and quarterbacks, and these are like IQ tests: extremely accurate. The system to find sports stars is as intentional as that of locating people with exceptional intellectual strengths.

Now, imagine how the world would change if there were aptitude scores for entrepreneurial talent -- if the U.S. could identify young people with this skill set and get them into accelerated development programs at the best schools. The day when there is a list of "blue-chip potential entrepreneurs" coming out of high school is the day when America will change forever and for the better. Job creation will surge, GDP will grow dramatically, and the country's whole culture and attitude toward entrepreneurship will be transformed. Most importantly, the country's core assumption about what fosters long-term economic growth will change.

Here's a policy recommendation: The U.S. Department of Education should lead the creation and passing of a bill that requires all high schools and middle schools to test every student for entrepreneurial aptitude. Gallup is working with some of the best test makers in the world now, and we are confident that the intellectual attributes of entrepreneurship are as testable as IQ, athletic "40 speed," or vertical jump height.

There are many pieces of this breakthrough in labs across the country now. Once the Department of Education has made this command decision, it should turn the rest over to states and cities to fashion their own curriculum strategies. A big part of this is getting local businesses involved as well as aligning all the great American youth organizations, such as Junior Achievement, 4-H, DECA, and so on. Perfect execution would require grand strategies by states and cities.

There are nearly 30 million students in U.S. middle and high schools right now. Early research in Gallup labs shows that about three in 1,000 working-age adults in the U.S. possess the rare talents of entrepreneurship. So that means there are potentially about 90,000 future "freaks of nature" out there. Let me take the liberty of rounding that number up to 100,000 potential blue-chippers -- potential entrepreneurs like Steve Jobs or Wayne Huizenga or Meg Whitman. America needs to find them all and make their entrepreneurial development as systematic and intentional as intellectual development is in this country.

When and if the country executes this leadership intervention to perfection, it will fix what I believe is the single most serious cause of America's failing economy and failing GDP growth. Each year over the past four-plus years, the total number of new business startups has declined. Simply put, American free enterprise is dying. I know that sounds harsh. But my understanding is that new business startups have fallen below 400,000 per year, while the country needs a bare minimum of 1 million startups per year for the great experiment called America to continue and progress in any recognizable form.

Correct assumption No. 2: Small businesses are the key to America's economic revival

When small businesses boom, jobs boom, GDP booms, and exports boom.

There are approximately 6 million small businesses in the United States, and they are the very backbone of the country's democracy. Those businesses fund significantly more American jobs and GDP than big business does. Here is something you likely don't know: Of the 6 million small businesses out there, 75% of the owners or proprietors aren't in business to build something big. They aren't trying to build the next Intel or Waste Management. They're not even in it for the money. Most small-businesspeople are in it for one reason: freedom. Almost no leader in the world knows that.

Three out of four entrepreneurs get up each morning with the simple yearning for total, complete, unimpeded independence. They must be their own boss or they can't cope with the day. They cannot be employed at IBM or even at a local car dealership because they are like the coyote -- they can never be domesticated. So let's not try. Instead, let's say, "God bless you for all the jobs and economic energy you create. It's great to have you here."

The remaining 25% of these small businesses do want to build something big. They do get up every day dreaming of creating an empire of customers and services. They are the most important people on the planet because when they win, America wins -- and when America wins, so does the global economy.

When these 1.5 million businesses boom, jobs boom, GDP booms, and exports boom. In my view, nothing is more heroic in America right now than creating a customer abroad. The White House should give medals every Monday morning to small-business owners who are booming because they have found foreign customers to export to, and those exports are crucial to creating American jobs. It's not too hard to believe that whether the U.S. goes broke or is prospering in 10 years lies predominantly in the American cultural phenomenon of small business -- the 1.5 million empire builders.

Correct assumption No. 3: Entrepreneurship must be fostered at the city level

Let me narrow that 1.5 million number down to 1 million, because that's probably a more accurate estimate of high-potential small-business boomers and empire builders. And I'd rather use a more conservative figure.

Here is an intervention that would help those 1 million small-businesspeople prosper and thrive and thus drive a resurgence of the U.S. economy: Cities should dedicate one great coach -- a local star senior adviser, an executive or entrepreneur with a proven track record of success -- for every 10 high-potential small businesses. This is not an activity for Washington or for the states. This must happen city by city.

What we need at the national level is a campaign that asks every single mayor and city councilperson in the country this question: What is your plan to boom high-potential small businesses? Although, in my opinion, many mayors and city council members likely will have little grasp of the subject of entrepreneurship. Still, they're the place to start because the future of their cities depends on the degree to which they make their cities attractive to entrepreneurs. Those city leaders may think their job is negotiating union contracts and government-employee benefits, but they won't be able to pay their employees, much less help their cities prosper and thrive, without a growing and thriving entrepreneurial sector.

The right answer to the question is: Set up my proposed formal senior-adviser program. When a city takes an intentional, organized interest in developing and nurturing local small businesses, two things happen:

The high-potential small businesses get advice that helps them remove barriers, which causes them to grow much faster.

There is a Hawthorne effect in that, prior to this new formal program, these businesspeople didn't know anyone cared about them except for their banker and best customers. This new, caring attitude changes the culture in a city. It fosters the all-important entrepreneurial spirit, which is ultimately more emotional than it is fiscal or rational. In my view, a historic burst of entrepreneur-based economic energy is the only thing that will save America.

The path toward long-term growth

To jump-start a stagnant U.S. economy and put the country on a path toward long-term economic growth and prosperity -- even global dominance once again -- leaders must get their assumptions right. They must understand that entrepreneurship trumps innovation and that finding the next generation of great entrepreneurs means cultivating them in middle schools, high schools, and colleges and universities, just as surely and intentionally as the country cultivates innovators.

Find the 100,000 entrepreneurial freaks of nature and intentionally develop them like rare-IQ students and blue-chip athletes. Next, identify the high-potential small businesses and put them into power relationships with local mentors. Finally, understand that entrepreneurship cannot be fostered by Washington but must be developed at the city level.

Get these assumptions right and act on them, and America -- rather than stagnating, declining, or flat-out going broke -- will rise to new heights of global economic leadership.

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